Finance Blog number 1

The euro-region economy barely contracted in the second quarter as Germany and France unexpectedly returned to growth, suggesting Europe’s worst recession since World War II is coming to an end.

Gross domestic product fell 0.1 percent from the first quarter, when it plunged 2.5 percent, the most since the euro- area data were first compiled in 1995, the European Union’s statistics office in Luxembourg said today. Economists had estimated GDP declined 0.5 percent in the three months through June, the median of 32 forecasts in a Bloomberg survey showed.

Stocks rose and the euro climbed after today’s figures added to evidence the worst of the global slump has passed. Demand for European exports is improving just as government rescue packages and lower interest rates support spending at home. While the data suggest the European Central Bank won’t need to add to stimulus measures, rising unemployment across the region may still stifle consumer spending.

“There is a more-than-decent chance that euro-zone economic activity has now hit a bottom and will expand again in the third quarter, as many other economies follow Germany and France out of recession,” said Martin van Vliet, senior economist at ING Bank in Amsterdam. “However, we fear that the recovery will be relatively slow and protracted.”

The euro rose to $1.4295 at 3:12 p.m. in London, up 0.8 percent on the day. The Dow Jones Stoxx 600 Index of European shares climbed 0.6 percent to 229.97.

Largest Economy

In Germany, Europe’s largest economy, second-quarter GDP rose a seasonally adjusted 0.3 percent from the first quarter, when it dropped 3.5 percent. The French economy also expanded 0.3 percent in the latest quarter.

Italy and the Netherlands were a drag on the euro-area economy. Italy’s economy contracted 0.5 percent and Dutch GDP declined 0.9 percent in the second quarter.

The economic improvement in Germany comes as Chancellor Angela Merkel campaigns for a second term ahead of national elections on Sept. 27. Merkel’s Christian Democratic bloc and her preferred coalition partner, the Free Democratic Party, held at 51 percent in a Forsa poll for Stern magazine released on Aug. 11. The Social Democrats had 21 percent support.

“Merkel will be in a position to exploit the early return to growth, but I would be surprised if she did it in strong words,” said Laurent Bilke, a senior economist at Nomura in London. “Some caution is still warranted as long as the labor market continues to weaken.”

Shifting Fortunes

The figures highlight shifting fortunes across Europe’s largest economies. In the U.K., where Prime Minister Gordon Brown is struggling to shore up his popularity before elections due in June, GDP contracted 0.8 percent in the second quarter, more than twice what economists forecast. Economies in the Czech Republic, Hungary and Romania also continued to shrink.

Euro-area GDP has declined for five straight quarters, the longest contraction since the data series started 14 years ago. The statistics office is scheduled to publish a breakdown of second-quarter GDP on Sept. 2.

While signs of a global recovery have prompted speculation about central banks’ exit strategies, the ECB is showing little willingness to depart from its current strategy of offering banks unlimited cash and keeping rates at a record low personal loans.

ECB President Jean-Claude Trichet said last week that council members “never pre-commit in any respect on the timing of various measures” after the bank last month started buying covered bonds. Federal Reserve policy makers yesterday signaled they will avoid any rush to end their own efforts to strengthen a U.S. recovery.

‘Little Later’

“The ECB won’t make a big mistake if they exit a little later,” said Holger Schmieding, chief European economist at Bank of America-Merrill Lynch in London. “They don’t need to rush.”

The global economy may already be past the worst of the slump. Confidence in the world economy surged to a 22-month high in August, a Bloomberg survey of users on six continents showed yesterday. The U.S. economy, the world’s biggest, contracted at a less-than-forecast 1 percent annual rate in the second quarter after shrinking 6.4 percent in the previous three months. In Japan, household sentiment rose for a seventh month in July.

The ECB, which kept its key interest rate at a record low of 1 percent last week, has offered unlimited cash to banks over 12 months and started buying covered bonds to fight the slump. The Frankfurt-based central bank predicts the euro-area economy will shrink about 4.6 percent this year and around 0.3 percent in 2010. It will release revised forecasts next month.

Exit Strategy

“The better-than-expected GDP figures, taken together with recent firm monthly indicators, will almost certainly lead to upward revisions to the ECB’s growth forecasts next month,” said Nick Kounis, chief euro-region economist at Fortis Bank in Amsterdam. That “would make additional monetary-policy easing even less likely and start to focus market attention on an exit strategy,” he said.

Anheuser-Busch InBev NV, the Leuven, Belgium-based brewer formed in a $52 billion takeover last year, today reported a 13 percent gain in second-quarter earnings. Walldorf, Germany-based SAP AG, the world’s largest maker of business-management software, on July 29 raised its forecast for 2009 profitability.

‘Positive Signs’

“These are short-term positive signs, but the French and the Germans have thrown a lot at it. They’ve got the cash-for- clunkers program and subsidies in the labor market,” former Bank of England policy maker David Blanchflower said today in a Bloomberg Television interview from Hanover, New Hampshire. “My view is: early days; one quarter doesn’t make a trend.”

With some of the region’s largest companies including Amsterdam-based ING Groep NV and Germany’s Siemens AG cutting jobs, consumers may keep spending plans on hold. European retail sales unexpectedly declined in June. The European Commission forecasts unemployment will reach 11.5 percent next year.

From a year earlier, the euro-area economy shrank 4.6 percent in the second quarter, after a 4.9 percent contraction in the first three months of the year, today’s report showed.

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Russia’s economy contracted the most on record last quarter as rising unemployment sapped consumer demand, bank lending stalled and the government failed to approve a stimulus package until just two months ago.

Gross domestic product contracted an annual 10.9 percent in the second quarter, the Federal Statistics Service said today, citing preliminary data. The median estimate in a Bloomberg survey of seven economists was for output to shrink 10.2 percent. The service’s data go as far back as 1995.

Russia’s economic decline is worsening after output contracted 9.8 percent in the first quarter, ending 10 years of expansion that averaged close to 7 percent. The worst global financial crisis since the Great Depression undermined demand for Russia’s oil, natural gas and metals. Industrial production plunged as companies depleted stocks and struggled to raise funds during the credit crunch.

“We can’t develop like this any longer,” President Dmitry Medvedevsaid yesterday during a meeting with political party leaders in the Black Sea resort of Sochi. “It’s a dead end. And the crisis has placed us in a situation where we will have to make decisions on changing the structure of the economy.”

The ruble weakened for a fifth day versus dollar, its longest losing streak since February, slipping 1.4 percent to 32.2419 per dollar in Moscow, the lowest level since July 13. The currency lost 1.4 percent against the euro to 45.7151. Those movements left the ruble at 38.2879 against the central bank’s target currency basket.

Russia ‘Crumbled’

Russia “crumbled” after commodity prices collapsed, Medvedev said. Energy, including oil and natural gas, accounted for 68.8 percent of exports to the Baltic states and countries outside the former Soviet Union in the first six months of the year, Russia’s Federal Customs Service said last week.

Urals crude oil, Russia’s chief export earner, averaged $61.03 a barrel during the last quarter after reaching a record $142.5 in July 2008.

Russia failed to free itself of its reliance on commodities during Prime Minister Vladimir Putin’s tenure as President between 2000 and 2008, said Natalia Orlova, chief economist at Alfa Bank, Russia’s biggest privately-owned lender.

“Because of high oil prices, capital came in; banks transferred this capital into the economy,” she said. “Rising wages fed consumer growth, so there was no reason to invest or create new production. Now capital has stopped coming in and consumption has stopped. This model has ceased to exist. We don’t have a new one.”

Putin

Putin, 56, stepped down in May 2008 after two terms in office and became prime minister under his hand-picked successor, Medvedev.

The government has done “catastrophically little” to diversify the economy in the decade since the 1998 financial crisis, Sergei Voloboev, a Credit Suisse economist in London, said by phone. GDP probably shrank a seasonally adjusted 0.2 percent in the second quarter compared to the first three months, according to Credit Suisse.

“The economy approached the bottom in the second quarter, basically it hit the bottom around May, June,” said Tatiana Orlova, an economist at ING Groep NV in Moscow faxless payday loan online. “We should see some better-looking data” in the coming quarters.

Russian stocks were little changed after losing as much as 1.3 percent earlier today after the release. The 30-stock Micex index was trading at 1100.31 at 3 p.m. in Moscow after yesterday’s 1.3 percent retreat. The RTS Index lost 1.3 percent to 1051.45 today.

Stocks

The Micex Index, which is mostly made up of energy companies, slipped into a bear market in June after falling more than 20 percent from its high on June 1, on concern a prolonged recession will cut demand for fuel. It gained 8.4 percent in July and is up 79 percent this year.

The world’s biggest energy exporter may run a budget deficit as wide as 9.4 percent of GDP this year, the country’s first shortfall in a decade, as plummeting demand for commodities threatens to cut revenue by a third, according to the Finance Ministry.

Russia has earmarked 2.51 trillion rubles ($79 billion) in spending to battle the slump, including funding designated for carmakers, agriculture and construction. The “anti-crisis” program was signed into law by Putin on June 19.

‘Might Fail’

“The planned fiscal relaxation might fail to stimulate private consumption in the face of significant uncertainty about future income,” the International Monetary Fund said in a report published on Aug. 7. “Absent a more determined policy intervention, there is a risk that banks will continue to struggle to adjust balance sheets, stifling credit expansion and impeding a recovery.”

Russia’s economy will need between four years and five years to match last year’s pace of growth, Finance Minister Alexei Kudrinsaid yesterday. GDP in 2008 grew at the slowest pace since 2002, expanding 5.6 percent compared with 8.1 percent a year earlier. The IMF forecasts a 6.5 percent economic contraction for Russia this year, followed by growth of 1.5 percent in 2010.

The central bank’s five interest-rate cuts since April 24 have failed to spur lending as banks hold back on concern borrowers can’t repay loans. Lending to consumers dropped 1.1 percent in June for the fifth consecutive monthly decline and banks shrank their corporate loan books by 1.2 percent, according to central bank data.

Subsistence Level

By the end of 2009, 17.4 percent of the population, or 24.6 million people, will be living beneath the subsistence level of $185 per month, almost 5 percent more than before the crisis, the World Bank said in a report released in June.

Rising numbers of jobless and falling wages will cut the country’s nascent middle class by 10 percent, or 6.2 million people, to about 51.2 percent of the population, the Washington- based lender said. Household consumption, “the main source of growth in recent years,” is “collapsing,” it added.

The economy may start to show signs of recovery in the third quarter this year, Deputy Economy Minister Andrei Klepach said on July 23.

GDP expanded a non-seasonally adjusted 7.5 percent from the previous quarter after contracting 23 percent in the first three months, the office said.

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The U.S. economy may be on the cusp of a recovery and the impact of the nation’s stimulus plan should increase this quarter, said Laura Tyson, an adviser to President Barack Obama.

“We may have hit stability, we may be in the beginning of an upturn” based on the latest economic data, Tyson, a member of the White House’s Economic Recovery Advisory Board, said yesterday during an interview in Kuala Lumpur. Nobel Prize- winning economist Paul Krugman said the deepest slump since the Great Depression may be ending.

“It’s quite possible, though not certain, that retrospectively, we’ll say that the recession ended in July or August, maybe September,” Krugman said in a separate interview in the Malaysian capital. “My guess is that we’ve bottomed out now, that August was probably the trough month.”

Krugman, 56, cited last week’s government report showing that the pace of U.S. job losses slowed more than forecast in July and the unemployment rate dropped for the first time in 15 months. He also pointed to reports by the Institute of Supply Management that manufacturing, while still contracting, is on the mend.

Tyson, 62, cautioned that declining housing values and an overhang of unsold homes pose threats to a recovery, and it’s too early to say the jobs report is the beginning of a trend.

“We’ve had one number that’s been slightly stronger than expected,” she said. “It’s pretty hard to read a single month as creating a trend. Most of the forecasts are still that the unemployment rate rises through till the end of the year.”

Unemployment Falls

U.S. payrolls fell by 247,000 in July, after a 443,000 loss in June. The jobless rate unexpectedly dropped to 9.4 percent from 9.5 percent. Obama said last week that the unemployment numbers indicate “the worst may be behind us.”

The report propelled the Standard & Poor’s 500 Index above 1,000 for the first time since November as U.S. stocks rose for a fourth week. The S&P 500 rose 2.3 percent to 1,010.48, the highest since Oct. 6. The Dow Jones Industrial Average climbed 198.46 points, or 2.2 percent, to 9,370.07.

The Aug. 7 Labor Department report came a week after the Commerce Department said U.S. gross domestic product shrank at a better-than-forecast 1 percent annual pace in the second quarter after a 6.4 percent drop in the prior three months online payday loans.

There’s no reason for a second stimulus package now, Tyson said in the interview. She suggested on July 7 the U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was “a bit too small.” She told CNBC three days later that it’s premature to plan for a second stimulus package.

Stimulus Expectations

“We know that relative to plan, the stimulus package in place is performing along expectations,” Tyson said yesterday. “Right now, based on the evidence that the economy has put forward and the stimulus spend out relative to plan, there isn’t any reason to think about a next round.”

Policy makers may want to consider doing more for unemployed Americans, Tyson said. Employers have eliminated about 6.7 million jobs since the recession began in December 2007, the most since the Great Depression.

Congress will consider extending unemployment benefits next month when lawmakers return from their August recess, Majority Leader Harry Reid said Aug. 7. The Senate’s top Democrat said 1.5 million Americans may exhaust their benefits by the end of the year if Congress doesn’t act.

“That could be considered as a second stimulus or it could be considered as an extension of unemployment compensation,” said Tyson, a professor at the University of California’s Walter A. Haas School of Business, who was an adviser to Obama during last year’s presidential campaign.

1 Million Jobs

Krugman, a Princeton University economist, said the stimulus plan probably saved 1 million jobs. He said a second package is needed and should be directed at state and local governments as well as spending on construction projects.

The U.S. economy may be the first after Asia to “take off,” said Raghuram Rajan, the former chief economist of the International Monetary Fund who’s now a professor at the University of Chicago.

“Unemployment may continue rising and job losses may continue, but growth will start picking up in the U.S.,” Rajan, 46, said in an interview yesterday. “We will get a few quarters of rebound growth.”

Krugman, Tyson and Rajan were in Kuala Lumpur for the World Capital Markets Symposium, which starts today.

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President Barack Obama said today’s unemployment numbers indicate “the worst may be behind us” for the recession and that his administration has “rescued our economy from catastrophe.”

The Labor Department report showing a slower rate of job losses, along with gross domestic product figures released earlier, show “we are pointed in the right direction,” Obama said in remarks at the White House.

Obama spoke hours after the government reported the unemployment rate dipped to 9.4 percent in July from 9.5 percent the month before and job losses slowed more than forecast.

“We’ve pulled the financial system back from the brink,” Obama said. “I am convinced that we can see a light at the end of the tunnel.”

For more than a week, the president has been changing his rhetoric as economic indicators show the nation’s worst recession since the Great Depression may have hit bottom.

On July 29, Obama first signaled the economy may have begun to improve when, during speeches in North Carolina and Virginia, he said the U.S. “may be seeing the beginning of the end of the recession.”

‘Still a Lot Wrong’

The administration still expects the unemployment rate will rise to 10 percent or higher before beginning a sustained decline, White House press secretary Robert Gibbs said earlier.

“Obviously, there’s still a lot wrong with our economy,” Gibbs told reporters. “I would describe today’s report as the least-bad report that we’ve had in a year, right? We still have a long way to go.”

The state of the economy later this year is likely to have an impact on the president’s ability to push through Congress his top two domestic priorities: overhauling the health-care system and curbing carbon emissions to combat global warming instant credit report.

In recent weeks, polls show the president’s job-approval ratings have been sinking, fueled by concern about the rising unemployment rate and the growing budget deficit.

A Quinnipiac University poll found half the registered voters surveyed from July 27 to Aug. 3 approve of the job Obama is doing, compared with 42 percent who disapprove. That’s down from 57 percent approval and 33 percent disapproval in a poll taken in late June.

Jobs Lost

The latest Labor Department numbers brought total jobs lost since the recession began in December 2007 to about 6.7 million, the biggest decline in any post-World War II recession.

The Commerce Department reported July 31 that the GDP shrank at a better-than-forecast 1 percent annual pace in the second quarter after a 6.4 percent drop in the prior three months.

The GDP figure “showed a marked improvement over the last few months,” Obama said today. “This morning we received additional signs that the worst may be behind us.”

He used the figures to argue that the $787 billion stimulus plan he pushed through Congress and other measures are having an effect. He also said the U.S. must take steps to ensure a more stable economy in the future, including enacting his health-care and energy initiatives.

“We can’t afford to return to an economy based on inflated profits and maxed-out credit cards, an economy where we depend on dirty and outdated sources of energy, an economy where we’re burdened by soaring health-care costs,” he said.

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The Federal Reserve plans to strengthen its examinations of banks’ lending practices and financial health with new teams composed of experts in everything from law to economics and markets.

Fed Governor Daniel Tarullo outlined the step in testimony prepared for a Senate Banking Committee hearing in Washington today. The overhaul, which would make reviews more uniform across the banking system, builds on the stress tests the central bank completed on the biggest 19 banks in May, he said.

The initiative comes as criticism spreads of President Barack Obama’s proposal to give the Fed powers to oversee systemic financial risks. Treasury Secretary Timothy Geithner last week told regulatory chiefs — including Sheila Bair, the Federal Deposit Insurance Corp. chairman who opposes making the Fed the sole systemic-risk agency — they should stop attempts to campaign against the administration’s revamp of rules for the industry, a person familiar with the matter said.

“We are prioritizing and expanding” the examination process to “assess key operations, risks and risk management activities of large institutions,” Tarullo said in prepared remarks for today’s hearing. “This program will be distinct from the activities of on-site examination teams so as to provide an independent supervisory perspective.”

Regulatory Lapses

The Fed, like other bank agencies, has come under criticism by lawmakers and investors for not curbing excessive risk taking on Wall Street that led to the worst financial crisis since the Great Depression. Congress is weighing the administration’s proposals to toughen oversight and set new rules for banks, the biggest overhaul in decades.

Regulators have each opposed some aspect of the Obama plan. Fed Chairman Ben S. Bernanke has sought to retain authority for protecting consumers of financial products after the administration sought to create a new agency for the task.

Bair and Securities and Exchange Commission Chairman Mary Schapiro have favored a council of agencies — rather than the Fed — to have powers to rein in risk-taking at financial firms so large or interconnected their failure would threaten the system.

Geithner, in a July 31 meeting aimed at cracking down on dissent, used strong language with the regulatory heads, reflecting concern at the fate of the administration’s proposals, the person briefed on the matter said on condition of anonymity.

The Wall Street Journal reported on the meeting yesterday.

Monetary Policy

The Obama plan has drawn fire from both Democrats and Republicans who argue that the central bank should focus on monetary policy. They have pointed out that the Fed, as the regulator of bank holding companies, supervised some of the biggest lenders that required rescuing, including Citigroup Inc. and Bank of America Corp.

Tarullo, 56, the first Fed governor appointed by Obama, has become the central bank’s coordinator on revising the examination process business cards. Within the Fed, he has become an advocate for increasing the board’s control over supervision.

The Senate banking panel also plans to hear testimony from Bair and other regulators about how to improve bank oversight.

“The crisis has revealed significant risk-management deficiencies at a wide range of financial institutions,” Tarullo said. “It has also challenged some of the assumptions and analysis on which conventional supervisory wisdom has been based.”

District Banks

While not giving many details on the supervisory overhaul, Tarullo indicated that the examinations, now run largely by Fed district banks across the country, will be bolstered by the board in Washington.

He said the Fed is “creating an enhanced quantitative surveillance program that will use supervisory information, firm-specific data analysis and market-based indicators to identify developing strains and imbalances that may affect multiple institutions, as well as emerging risks to specific firms.”

“This work will be performed by a multidisciplinary group composed of our economic and market researchers, supervisors, market operations specialists and accounting and legal experts,” Tarullo said.

Losses Soared

Banks and other financial institutions have reported more than $1.5 trillion in credit losses and writedowns worldwide since the global credit crisis began. Many of those losses stemmed from mortgage-related investments that declined with the collapse in the housing market.

Tarullo didn’t discuss the outlook for the U.S. economy or monetary policy in his testimony.

He said the central bank will soon release guidance on how to “promote compensation practices that are consistent with sound risk-management principles and safe and sound banking.”

The Fed governor also said that General Electric Co. and companies that already own finance arms or industrial-loan businesses, known as ILCs, should be able to retain them without being subject to Fed oversight of manufacturing and nonbank operations. While the Fed favors not adding more ILCs, existing structures should be “grandfathered” and not forced to separate “in the interest of fairness,” he said.

GE has supported no changes to the status quo so that it can keep its manufacturing operations along with its GE Capital finance arm without having to separate under a bank holding company structure. Last week, Representative Barney Frank, a Massachusetts Democrat and chairman of the House Financial Services Committee, supported Fairfield, Connecticut-based GE’s stance. GE has said it is in favor of systemic regulations and expects change in the rules governing its finance arm.

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The U.S. unemployment rate may not peak until the second half of 2010, possibly necessitating another extension in unemployment benefits, U.S. Treasury Secretary Timothy Geithner said.

“I think that is something that the administration and Congress are going to look very carefully at as we get closer to the end of this year,” Geithner said in an interview today on ABC’s “This Week” program.

The U.S. economy contracted at a better-than-forecast 1 percent annual pace in the second quarter, the Commerce Department reported July 31. Stabilization of housing markets and consumer spending, a lessening of financial turmoil and increased government spending all suggest the longest recession since the 1930s may be close to ending.

“There are signs the recession is easing,” Geithner said. “The broad consensus of private forecasters is that you are going to see positive growth in the second half of this year and expect that to continue.” Still, it is “not clear yet” how strong growth will be.

Lawrence Summers, director of the White House National Economic Council, said that while the economy will resume growth in the second half of the year, the job picture “will be serious for some time to come.”

“We have walked back from what we were facing six month ago,” Summers said on NBC’s “Meet the Press” today. “It’s going to take time before you see it in the unemployment rate.”

‘Do What’s Necessary’

Summers said the Obama administration will work with Congress to “do what’s necessary to make sure appropriate unemployment benefits are available.”

Congressman Charles Rangel, chairman of the House Ways and Means Committee, said he supports extending unemployment insurance benefits for another 13 weeks.

“There’s no question, they deserve it,” he said on Fox News Sunday. “They are the true victims of this fiscal disaster.”

Senator Jim DeMint, a South Carolina Republican, said he’ll “definitely support” extending unemployment benefits cashadvance.

Economic growth will average 1.5 percent in the July- to-December period, according to a Bloomberg News survey of economists in July.

“You are going to see the pace of job losses slow materially,” Geithner said. “Again most private forecasters, let’s use their judgment, suggest you’re going to see unemployment start to come down maybe beginning in the second half of next year.”

Teachers, Police Officers

Summers said less than 10 percent of President Barack Obama’s economic stimulus plan goes to job creation in 2009, with most new jobs coming later. He said the administration still expects the stimulus to save or create at least 3 million jobs, and pointed to teachers and law enforcement officers who kept jobs because of the additional funding.

The problem, he said, was that the economy was in worse shape last year than many economists thought.

“Unemployment increased more than almost anyone expected,” Summers said. “Businesses were more scared than we realized and were much quicker to lay people off.”

Fed Chairman Ben S. Bernanke predicted a week ago the U.S. unemployment rate will top 10 percent, up from 9.5 percent in June, even as the economy recovers from the worst recession in at least five decades. Growth of about 1 percent is likely in the second half of the year, Bernanke said at a town-hall-style meeting.

Geithner said once the recovery is established, the administration will focus on reducing government budget deficits.

“Recovery will not be strong enough to sustain unless we can convince the American people that we’re going to have the will to bring these deficits down once recovery is firmly established,” he said.

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